Mkt to go up in '10 despite policy tightening: JPMorgan AMC

Excerpts from Your World at 10 on CNBC-TV18 Watch the full show » RELATED NEWS 2010 to be a difficult year for co: Seamec After economic storm, Asia faces 2010 political risks What 2010 may hold for equity markets ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 02/03/12 Are Mutual Funds betting on Nifty?

It's time to look back at the year that has been. At the start of this year, there was no massive market rally coming. As the year ends, it rally looks a tad bit tired. With interest rates likely to be raised in the first half of 2010, what is the outlook for the Indian markets over the course of next year?

In an interview with CNBC-TV18, Edward Pulling, Managing Director of the Pacific Regional Group, JPMorgan Asset Management, spoke about his outlook for 2010.

Here is a verbatim transcript of an exclusive interview with Edward Pulling on CNBC-TV18. Also watch the accompanying video.

Q: We have seen some recent foreign debt crisis, like Dubai, there was a worry on Greece, and do you think that some of these could be the next big global shock that could have some collateral damage on India as well?

A: In isolation, I don't think any of these countries or events post risk to India or the global recovery in stock markets. I think they are all reminders that we are nowhere near finished with the required global deleveraging. So Dubai is yet another reminder that there is overinvestment and we need to address that. Even if we add up Greece and Dubai together I don't think poses mortal risk.

Q: Many people say this might be a double dip recession, is that something you still subscribe to?

A: No we are not subscribing to the double dip recession. I think there our base case for the global economy which is a lower rate of growth in 2010 than normalised over the past decade or so but not a double dip recession. So if you want me to put numbers on that that basically means that western economies is growing at about 2% so not 3-4% which will be a great recovery but not a double dip recession. And, frankly if we are right about that level of growth in the western economies, that is generally good news for Asia because it means an extension of a low interest rate policy imported from the west.

Q: Do you anticipate any further global serious shocks to the global financial system?

A: Dubai is times 5 out there but I don't see them right now but then again I didn't see a lot of things that have happened in the past 18 months. So the fact of these are that there are temporary setbacks to risk appetite and that is the transmission mechanism that hits India, the Indian stock market is still perceived internationally and even locally as a risky stock market. So when as risk appetite dips due to a Dubai, Greece or whatever, India takes it on the chin but it's brief.

Q: Had 2009 lived up to your expectation? What do you expect for next year?

A: This year has exceeded my and everybody's expectations. Looking forward to 2010, we are at an inflection point in India right now. The economy is clearly recovering. We have seen that in the GDP number, in the latest IIP number and in the latest WPI number. So, monetary policy here is going to adjust during the course of 2010.

RBI has always tried to get out in front of inflation. Monetary policy will not address the problem in the food sector with food shortages. We all know that but as the economy continues to accelerate its growth rate, it makes sense for RBI to remove some of the generous stimulus that it provided in the last 12 months.

In no particular order and quarter, we should expect adjustments to the CRR and at some points the policy interest rates. However, at the end of the day, loan growth rate now is still low and monetary policy will not have any affect on food price inflation. 2010 should then be a year of adjustment in monetary policy. If you look over the next three years, I expect a sharp increase in the rate of earnings growth in India.

Q: What kind of interest rate hikes you are expecting over the course of the next six months?

A: I am not expecting a policy rate hike over the next six months.

Q: So just a bit of sucking up the liquidity?

A: I think so; I think we could probably expect a CRR move and an interest rate move in the second half of calendar year 2010. In the last monetary cycle, the RBI first acted in October 2004 and at that point the Sensex was at about 5,500. So the RBI then kept a tight monetary policy for the ensuing three years and the market essentially quadrupled. What took the market higher despite a tight policy for three years?-earnings and economic growth and also an acceleration in credit growth which I also expect will happen here. So with 9-10% credit growth rate now I can see that number increasingly steadily over the next three years.

Q: What is the impact of tightening liquidity and potential rate hikes over the course of the next calendar year on the way you invest in India about a third of your money in India is invested in financials? How is that going to change once you see ASTERN the interest rate cycle?

A: If the treasury departments in the banks are on top of things then it should not really have an effect on my investments. So the treasury departments in the banks, in which we invest are infinitely more tuned into this and have much more refined opinions, sees slight adjustments to monetary policy.
I cannot comment on whether we would be changing our allocation to financial services due to our views on monetary policy. However, I am very confident in the management of the banks in which we have invested that they will be able to navigate this inflection point without incident. I cannot comment on longer-term developments. If I am right bank lending grows from 10% to 30-35% over the next three years, financial services are a pretty good place to be.